Turmoil takes its toll after 2-day respite

After two days of recovery, markets fell back with a vengeance yesterday. TheFTSE 100 lost 122.7 points to 6271.2, while the mid-cap FTSE 250 was 242.9 points lower at 11212.1. By the time London closed, the Dow Jones industrial average was down by around 150 points.

In Europe France's CAC 40 dropped more than 2% while Germany's Xetra Dax fell by a similar amount.

Investors fear the credit problems which began with the US sub-prime mortgage market are accelerating. French investment bank BNP Paribas has frozen three funds because of the knock-on effects of the sub-prime troubles. Traders believe continental banks could be most exposed to the debt problems associated with sub-prime, and Germany's IKB has already said it is affected. There were also rumours of problems at WestLB, another German bank with exposure to sub-prime.

In response to the turmoil, the European Central Bank acted to pump €95bn (£64.5bn) of euros into the credit markets to improve liquidity.

The US Federal Reserve later said it was putting $24bn (£12bn) into the US banking system. There was also a rumour the Fed might cut interest rates, an emergency move two days after its scheduled meeting left the cost of borrowing unchanged. "This is highly unlikely but the fact that such a rumour is circulating at all is significant," said Martin Slaney, head of spread betting at GFT Global Markets. "A cut in US rates in the September Fed meeting is without doubt back on the cards."

On top of that, the UK mid-cap market was unusually volatile. Dealers said one or perhaps two investment funds with short and long positions were being liquidated, leading to huge price movements in a range of stocks.

One name in the frame was said to be Goldman Sachs' Global Alpha hedge fund, a $9bn investment vehicle. The list of stocks in the Goldman fund was said to be similar to some of the companies with major movements yesterday. Goldman denied the fund - or indeed any of its funds - was being liquidated. "It's business as usual, there is no basis for this rumour," said a spokeswoman.

Computer retailer Game Group was one of the biggest fallers in the 250, down 25.5p to 171p. Its shares were already weaker before an afternoon statement from the Office of Fair Trading announcing it planned to refer Game Group's completed acquisition of rival Game Station to the Competition Commission. Game said it was disappointed at the news, and issued an upbeat trading statement which showed like-for-like sales - excluding Game Station - had risen by 45.6% in the 26 weeks to the end of July.

Among other mid caps caught up in the turmoil, oil services company Hunting dropped 35.5p to 685.5p, engineering business Keller lost 34p to 870p and property group Brixton was down 11p to 352.75p. Retailer Carpetright rose 57p to £12.78 at one point before ending down 1p at £12.20p. Racecourse owner Arena Leisure added 1p to 64.75p, helped by later news the company's chairman had bought 1m shares at 66.75p.

Inevitably financial shares were among the leading fallers in the 100 index. Hedge fund Man lost 38p to 527p and private equity group 3i fell 65p to £10.56. Broker and corporate finance group Collins Stewart slipped 7p to 193p.

Banks were battered, with HBOS down 46.5p to 913p. Barclays off 31p to 681.5p and Royal Bank of Scotland, its rival to buy Dutch bank ABN Amro, down 14.5p to 584.5p.

Alliance & Leicester bucked the trend, adding 13p to £11.20 on continuing bid speculation. It also bought back 41,104 shares - a move it could not make if it was in takeover talks.

Insurer Standard Life lost 22.25p to 318.75p on profit taking after Tuesday's good new business figures. Cazenove moved its recommendation from outperform to in-line, while Citigroup issued a hold note.

Utilities were lower after disappointing results from International Power, down 9.75p to 439.5p. British Energy lost 9.75p to 464.75p in sympathy.

Miners fell back on fears the current credit problems could have an impact on global economic growth, with Kazakhmys 82p lower at £11.25. Copper fell to a fresh six-week low.

Drugs group AstraZeneca slipped 87p to £24.30 as US regulators said they were looking at heart risks associated with the company's Nexium and Prilosec heartburn drugs. Support services group Carter & Carter climbed 25.5p to 130p as UBS raised its price target from 75p to 105p after yesterday's trading statement, while Futura Medical was 7.5p better at 59.25p after positive study results for its new style condoms.

Messaging International was a star performer, soaring 1.15p to 1.525p as it signed an agreement to launch its services - which allow pictures, music and text to be sent from PCs to mobile phones - in Thailand.

Finally shares in Dobbies Garden Centres, down 27.5p at £16.45, could drop further today after Sir Tom Hunter said he did not intend to mount a rival bid to the £15 a share offer from Tesco.

Eyes on laser Australian-based but Aim-listed Customvis, the inventor of what it claims is the world's only solid-state laser for eye surgery, ran into financing problems two years ago. Since then it has had a couple of fundraisings and is now producing lasers at the rate of three a month. Most of its sales are in Australia and Asia, but its equipment is being evaluated by at least one hospital in the UK. The US, of course, is a key market, and here the company is expected to push for approval from the Food and Drug Administration. This, however, could take two to three years. In the meantime it wants to increase its sales force, now the product is becoming more established, and may need to raise more money to help achieve this. Yesterday its shares held steady at 4.5p.